Last week was a good week for the Russian stock market although the elections to the State Duma brought about no buying spree, their results have been predictable. Nonetheless, what we saw last week was a buyer's market.
On Monday, December 10, Russian stock indexes jumped to all-time highs on reports that First Deputy Prime Minister Dmitry Medvedev had been nominated as a candidate for president of the Russian Federation, and that his candidacy had won the approval of the United Russia party and of President Vladimir Putin personally.
Judging by the market's response, Medvedev's nomination Putin's successor suits both Russian and Western market players fine. The stock market always reacts positively when it clearly sees the direction of the country's future political development. The Kremlin will now make all its administrative resources work for Medvedev; so it's almost certain that he will be elected the next president of Russia.
The market sees Medvedev as standing closer to real business, and business people believe he is a better liberal than Sergei Ivanov, a first deputy prime minister and former minister of defense. Monday's jump in Russian stock indexes signifies, if anything, a forerunner of the "Medvedev for president" rally of February-March 2008.
Last week's surge was also due to the start of December, traditionally one of the best months for the Russian stock market. The month got off to a good start, and investors are capitalizing on any decline in quotes to snap up cheap stocks.
Everything would have been fine were it not that last week's surge on Western bourses, which encouraged buying on the Russian stock market, came up against the economic woes of the U.S. and the Eurozone countries.
U.S. stock indexes last week likewise inclined toward growth as investors became less anxious over the crisis in the U.S. subprime mortgage market. Besides, Wall Street was expecting the Federal Reserve to make another cut in the discount rate. As we see it, however, last week's rally on Western bourses was more reminiscent of investors putting a brave face on a sorry business.
American investors were enthusiastic about the U.S. government's new plan for subprime mortgage loans that with floating interest rates. Preoccupied with their bull games, they failed to notice a report from Moody's that the depreciation of asset-backed debt instruments had spread to paper based on educational loans. On top of that, the U.S. media warned that the amount of overdue payments on car loans had reached the highest level in years. These negatives appear to be the first signals portending a second wave of crisis on U.S. credit markets.
In early 2008, the top U.S. corporations will release their financial statements for the fourth quarter of 2007, which will reflect the latest losses due to the credit crunch and to slower U.S. economic growth. In this connection, Standard & Poor's foresees a looming recession and declines in profits.
In the Russian stock market, gas utility Gazprom was last week's undisputed growth leader, its shares finishing 9.8 percent higher. Twenty-three gas deposits, including nine located on the continental shelf and containing a total of 5.2 trillion cubic meters of gas, will most likely go to Gazprom without competitive tender. This will give a big boost to the gas giant's capitalization.
Moreover, there was high demand for Russian ADRs on the part of nonresidents, and this encouraged buying of the leading Russian stocks on the domestic market.
So, due to positive external factors and to strong domestic fundamentals, the odds are that Russian stock indexes will hit all-time highs toward New Year's Day. This might happen provided Western stock markets do not crash on the wave of a new meltdown in the U.S. mortgage market.
By Aleksander Potavin, Market Analyst, Antanta Pioglobal Investment Group
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